Cryptology ePrint Archive: Report 2021/1605

Inflation-Tracking Proof-of-Work Crypto-Currencies

Charanjit S. Jutla

Abstract: We show that Bitcoin and other egalitarian crypto-currencies are unstable as store-of-value as they fail to track inflation of local currencies closely, and the price dynamic is purely driven by speculation. Based on rational expectations equilibrium, we argue that if the coins awarded during mining are increased in proportion to increase in difficulty of the underlying cryptographic puzzle, then the price of the coin is likely to track inflation of local currencies closely over medium to long term. Further, a hyper-geometric tapering, instead of a geometric tapering, of the mining award over time is recommended for bootstrapping interest in the crypto-currency.

Category / Keywords: applications / Bitcoin, consensus, digital signatures, hash chain, rational expectations, Keynes

Date: received 8 Dec 2021, last revised 31 Dec 2021

Contact author: csjutla at us ibm com

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Note: Minor edits and added more citations

Version: 20211231:213057 (All versions of this report)

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